It is a statement that is often mentioned when discussing Gold.
"Gold is in a bubble"
It is a comment that is usually made with little evidence to support this claim. Typically, the primary support is the fact that the Gold price has meaningfully risen over the last decade. But citing a rising price is simply insufficient to draw such conclusions.
Gold is not in a bubble. This is true for several reasons.
While I will be focusing on the SPDR Gold Trust (GLD) in this article, the same principles apply to the iShares Gold Trust (IAU), the ETFS Physical Swiss Gold Shares (SGOL) and the Sprott Physical Gold Trust (PHYS).
First, Gold has risen for a basic fundamental reason over the last decade. The current bull market in Gold began in January 2002. It is no coincidence that this marked the exact moment that U.S. policy makers shifted from a strong dollar policy to a weak dollar policy. As the dollar has fallen over the last decade, gold has risen. And given the fact that global central banks including the U.S. Federal Reserve remain engaged in competitive currency devaluations in an environment where markets remain on the brink of crisis, little reasons exists to suspect that this trend is going to stop any time soon.
Second, Gold has behaved consistently and rationally from a technical perspective over the years. For most of the last decade, the price of Gold has responded repeatedly to its 150-day and 200-day moving averages. And it has rarely deviated from these long-term trend lines. Gold's price movement over time also lacks any of the parabolic short-term price escalation that is characteristic of a bubble. To the contrary, it's price movement has been very predictable and rational all along the way.
Third, Gold is trading at a reasonable price ratio relative to the S&P 500 Index given the current market environment. Since 1971 when the Bretton Woods system was officially terminated and the gold price was free to fluctuate, we have experienced three market cycles. The first was a secular bear market for stocks that ended in 1982. The second was a secular bull market from 1982 to 2000. And the third is the secular bear market that has existed since 2000 through today. During the secular bull market, the stocks-to-gold ratio steadily increased amid price stability and investor confidence about the stability of the global economy. But during the two secular bear market phases, the stocks-to-gold ratio steadily declined due to inflationary/deflationary pressures and uncertainty surrounding the global economic instability and the viability of the fiat currency system. And at a current stocks-to-gold ratio of 0.85, we are still well above the lows of 0.22 reached at the bottom of the last secular bear market.
These are just three of many reasons why Gold is not in a bubble. Instead, Gold continues to represent an ideal portfolio allocation to protect against the threat of pricing instability and economic crisis across many regions around the world. This is particularly true with many global central banks still firmly engaged in increasingly easy monetary policy in an ongoing effort to restore growth. And as long as uncertainty reigns, Gold will continue to represent an attractive portfolio holding.
Disclaimer: This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.
Disclosure: I am long GLD.